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Starting January 1, 2018, the State Department commenced to deny the requests for US passport issuance and renewal made by individuals with “seriously delinquent tax debt”. Moreover, the State Department has been granted the authority for US passport revocation with respect to these individuals. Let’s explore this new law on passport revocation and denial for tax debt.

Passport Revocation and Denial: IRC Section 7345

Section 32101 of the 2015 Fixing America’s Surface Transportation Act (“FAST Act”) added IRC Section 7345, which requires the IRS to notify the State Department of taxpayers that the IRS has certified individuals as having “seriously delinquent tax debt.” This is called “Section 7345 Certification.” Once the State Department receives such a Certification, it is generally required to deny a passport application for the certified individuals and may even revoke or limit passports that were previously issued to these individuals.

Passport Revocation and Denial: Who Can Make Section 7345 Certifications

Only designated IRS officials may certify an individual or reverse Certification. IRC Section 7345(g) specifically reserves this right to the Commissioner of Internal Revenue, the Deputy Commissioner for Services and Enforcement of the Internal Revenue Service (IRS), or the Commissioner of an operating division of the IRS (collectively, “Commissioner or specified delegate”).

Passport Revocation and Denial: Seriously Delinquent Tax Debt

The term “seriously delinquent tax debt” is defined in IRC Section 7345(b)(1), which sets up four requirements. First, the debt must be “unpaid, legally enforceable Federal tax liability of an individual.” Id. Note that the seriously delinquent tax debt is limited to liabilities incurred under Title 26 of the United States Code (i.e. the Internal Revenue Code). The term does not include items such as FBAR penalties and child support.

Third, the assessed liability must be greater than $50,000. IRC Section 7345(b)(1)(B). Pursuant to the IRC Section 7345(f), the $50,000 amount is adjusted for inflation each calendar year beginning after 2016. In fact, for 2018, the threshold amount is $51,000.

Finally, either a levy pursuant to IRC Section 6331 or a lien pursuant to the IRC Section 6323 has been issued with respect to the assessed tax liability. IRC Section 7345(b)(1)(C). Moreover, the administrative appeal rights under IRC Section 6320 with respect to the lien must have been either exhausted or lapsed. Id.

Passport Revocation and Denial: More Than $50,000 Threshold

In calculating whether the $50,000 federal tax liability threshold is met, the IRS will aggregate all of the current tax liabilities for all taxable years and periods assessed against an individual. It will also include penalties and interest.

Passport Revocation and Denial: Exclusions

Under the newly-issued IRS guidance, the term “seriously delinquent tax debt” for the purposes of passport revocation and denial does not include the following:

1. A debt that is being timely paid under an IRS-approved installment agreement under section 6159.

2. A debt that is being timely paid under an offer in compromise accepted by the IRS under section 7122.

3. A debt that is being timely paid under the terms of a settlement agreement with the Department of Justice under section 7122.

4. A debt in connection with a levy for which collection is suspended because of a request for a due process hearing (or because such a request is pending) under section 6330.

5. A debt for which collection is suspended because the individual made an innocent spouse election (section 6015(b) or (c)) or the individual requested innocent spouse relief (section 6015(f)).

Passport Revocation and Denial: Exceptions

Additionally, the State Department will not revoke or deny the US passport of a taxpayer if one of the following exceptions apply:

1. The taxpayer is in bankruptcy;

2. The IRS identified the taxpayer as a victim of tax-related identity theft;

3. The IRS determined that the taxpayer’s account is currently uncollectible due to hardship;

4. The taxpayer is located within a federally declared disaster area;

5. The taxpayer has a request pending with the IRS for an installment agreement;

6. The taxpayer has a pending offer in compromise with the IRS;

7. The taxpayer has an IRS-accepted adjustment that will satisfy the debt in full; or

8. If the taxpayer is serving in a designated combat zone or participating in a contingency operation, the IRS will postpone the Certification.

Passport Revocation and Denial: 90-Day Delay

Before denying a passport, the State Department will grant a taxpayer 90 days to allow him to either resolve any erroneous certification issues, make a full payment of the tax debt or enter into a payment arrangement with the IRS.

Passport Revocation and Denial: Main Remedy in Case of Erroneous Certification

In cases where the IRS makes an erroneous Certification or fails to revers a certification, a taxpayer does not have many choices. It appears that the taxpayer will not be able to appeal to the IRS Office of Appeals. The main course of action in these situations appears to be a civil action in court under IRC Section 7345(e).

Contact Sherayzen Law Office for Professional Help with US Tax Issues

Sherayzen Law Office is a highly experienced tax law firm based in Minneapolis. We have helped hundreds of US taxpayers to resolve their tax issues, and we can help you!

In a previous article, I outlined the three-prong legal test of the IRS Written Advice Defense. This article aims to explore the first prong of that test: the IRS written advice was reasonably relied upon by the taxpayer. In particular, I would like to explain two important concepts of this part of the test: “advice”and “reasonable reliance”.

IRS Written Advice Defense: Advice

In the context of the IRS Written Advice Defense, “advice” is not just any written response provided by the IRS. Rather, for purposes of the IRC section 6404(f), a written response issued to a taxpayer by the IRS “shall constitute ‘advice’ if, and only if, the response applies the tax laws to the specific facts submitted in writing by the taxpayer and provides a conclusion regarding the tax treatment to be accorded the taxpayer upon the application of the tax law to those facts.” Treas. Reg. § 301.6404-3(c)(1).

IRS Written Advice Defense: Reasonably Relied Upon

The IRS Written Advice Defense can only work if the taxpayer actually reasonably relied upon the advice furnished by the IRS – i.e. the taxpayer took an action or failed to act in response to the advice. One of the main issues here is the timing of the taxpayer’s reliance.

In situations related to an item on a taxpayer’s federal tax return, if an IRS advice was received after the taxpayer already filed his original return, the IRS Written Advice Defense is likely to fail because the IRS will not consider the taxpayer’s post factum reliance on its advice as reasonable.

There is an exception, however, with respect to situations where the taxpayer took action in response to the IRS advice and filed an amended tax return. As long as the amended return conforms with the IRS written advice, “the taxpayer will be considered to have reasonably relied upon the advice for purposes of the position set forth in the amended return.” Treas. Reg. §301.6404-3(b)(2)(iii).

Similarly, in cases where an IRS written advice is furnished with respect to an item unrelated to a federal tax return (e.g. estimated tax payments) and it is furnished before the taxpayer acted or failed to act on the item that caused the imposition of IRS penalties, the IRS will again not consider the taxpayer’s reliance as reasonable or timely.

IRS Written Advice Defense: Duration of the Period of Reliance

It is also important to remember that a period of reliance on the IRS written advice only lasts until the taxpayer is put on notice that the advice no longer corresponds to the IRS position. The question is: what does being “put on notice” mean?

There are five situations which will end the taxpayer’s period of reasonable reliance on the IRS advice as long as they occur subsequent to the issuance of the advice by the IRS:

(a) the taxpayer receives a letter from the IRS stating that the advice no longer reflects the IRS position;

(b) a tax treaty is enacted or a new tax law was passed and both of these events concern the item with respect to which the IRS advice was issued;

(c) A decision of the United States Supreme Court;

(d) The issuance of temporary or final regulations by the IRS ; or

(e) The issuance of a revenue ruling, a revenue procedure, or other statement by the IRS that was published in the Internal Revenue Bulletin.

Contact Sherayzen Law Office for Professional Help With Your IRS Written Advice Defense And Any Other Reasonable Cause Defense

If the IRS imposed penalties as a result of a tax return or FBAR audit, contact Sherayzen Law Office for professional help. Taxpayers around the world have learned to trust Sherayzen Law Office to bring their US tax affairs in order and rigorously defend them against the imposition of FBAR and other penalties related to the US international information returns. We can help You!